Target Aims for Cities: First 'Urban' Store Coming to Seattle in 2012

Target's (TGT) long focused on suburban markets with less competition and more available space. But now the second-largest discount retailer is looking to expand its customer base with stories in cities. It plans to open its first urban store in Seattle in 2012.

The new urban stores are expected to take up some 80,000 square feet of space, making them approximately one third larger than an average supermarket, but only about half the size of a typical Target store. They're intended to help Target gain market share both from supermarkets and from Wal-Mart Stores (WMT), its larger competitor.

"By opening these smaller stores and then doing that across the country, Target's declaring war on the supermarket sector," says Burt P. Flickinger III, managing director of New-York based retail consultant Strategic Resource Group. "Instead of getting shoppers to go to Target once a month, they're looking to get them once a week."

Wal-Mart Also Eying Cities

Wal-Mart also may be taking a similar approach as more suburban areas become saturated with big box stores. The world's largest retailer is looking for properties in cities such as San Francisco and Detroit, the Financial Timesreported earlier this week. The company aims to enter the Chicago market with more than 20 stores, including a mix of supercenters and smaller convenience stores, and plans to follow a similar strategy in other cities, Bill Simon, CEO of Wal-Mart's U.S. operations, told the Financial Times.

By operating smaller stores with fewer products, more expensive per-square-foot rents and -- for the most part -- higher distribution costs, both chains would be moving away from their tried-and-true formula of big.

Still, with roughly 30% of Target's products accounting for some 70% of its sales, Target has the opportunity to boost its margins with the new format, say both Flickinger and Richard D. Hastings, macro and consumer strategist at Newport Beach, Calif.-based Global Hunter Securities.

"Shoppers do not expect a smaller version of Target to have lots of gas grills and outdoor furniture; they expect all of the right items, in stock all the time," Hastings says. "Dense areas have been the final frontier for discount retailing in the U.S., and if Target and Wal-Mart don't get into this, then the final frontier would be gobbled up by chain drug and dollar stores."

Last month, Target reported that its profit for its fiscal second quarter, which ended July 31, rose 14% on revenue of $15.1 billion, with same-store sales up 1.7%. For comparison, Wal-Mart posted sales of $103 billion for the same quarter.